25 Nov, 2002
Big Companies Gobbling Up Small Seems To Be Over
LONDON: The era of large travel companies gobbling up small travel companies appears to be over.
Mr Roger Luscombe of Continental Capital Partners told a seminar at the recent World Travel Market 2002 that the mergers and acquisitions among travel companies that dominated the industry for the last 2-3 years is “not happening”.
He noted that past acquisitions have not been entirely positive with many companies facing “huge difficulties as business volumes collapsed”. Now he said the market is doubly cautious due to the uncertainty over Iraq.
Mr Luscombe referred to his company as a “corporate finance boutique” that specialises in buying and selling companies with one unit dedicated to the travel and tourism sector. In recent years, it has been involved in the sale of adventure tour operator Explore Worldwide to Holiday Break and Panorama Holidays to Airtours.
Other European companies that have been on a buying binge recently include the German tour operator TUI and the British Internet company lastminute.com. In recent weeks, there have been media reports about another UK company, Mytravel, also looking for a buyer.
Today, Mr Luscombe said, “volumes are sharply down across the board and valuations are also depressed. Former growth companies like Information Technology and Internet websites are no longer fashionable, while defensive sectors with steady cash flow, like food and drink, are in vogue.
“There have been many acquisitions and disposals in the last few years. Some of them have been successful and others have been a mess. Some have been forced to write down or write off the value of their investments. Some vendors have found the right partner and got a good fair value for their companies. Others have been tied up in warranties and conditionalities and what they thought didn’t arrive.”
Instead, there is a lot for consolidation and restructuring, rebranding and refocusing. “CEOs are sticking to their knitting,” he said.
The recent spate of corporate scandals, too, have had their impact. “The result of this is that advisors and lawyers and individuals involved in due diligence are much more cautious and as a result of that deals are taking longer.”
At the moment however, it is the development buyers, venture capitalists and financiers who are awash with cash and very active at the moment. “They have raised a lot of money from pension funds and banks and now have to make it work. However, trade buyers are much more cautious and hesitant.
“We are dealing with two such financial buyers in selling companies at the moment. While they have added complexity to the buy they are often the only game in town.”
Mr Luscombe said that over the long-term the travel and tourism industry is still seen as a relatively good bet although specialist companies that “cater to travelers rather than tourists” will be more favoured. As a rule, companies that specialize in short break holidays have done better than long-haul companies.
While valuations are fully down — about 30% since 9/11 – “companies with wining characteristics and unique concepts will have timeless appeal and still command premium prices,” he said.
Mr Luscombe offered a range of advice for those preparing to sell their companies, noting among other things that they will have to be very precise with what the company is worth and the real level of profitability. “Value like beauty lies in the eye of the beholder.”
He said efforts to fiddle financial figures will backfire. In the current atmosphere of corporate accountability, managements have to do things very transparently and legitimately.
He warned sellers about the need to protect themselves through proper confidentiality arrangements with potential buyers. “You don’t want to give too many trade secrets to someone who will set another company on your back after getting your information.”
Sellers also will need to bring aboard their management early in the game because they will be involved in the preparation of the documentation for the sale. At some stage, management will even be subjected to psychometric testing which Mr Luscombe can be a draining process because it can divert them from the business.
Asked to specify what this might entail, he said, “The financial buyers want to know if there is a stylistic and cultural fit (between the managements of the sellers and the potential buyers). So they try and identify what skills are in common.
“(The managers) may all be poets who don’t understand the business. The buyers will try and sift through the Type A or the Type B personalities, depending on the kind of people they feel they need.” He described the process as being more of a comfort-zone issue and “not overall very important” in the deal-making.
Potential buyers will consider issues like strategic positioning, management quality, growth prospects and scalability. He also advised sellers to do proper research to establish where their company stands in the market. “Is it the market leader, how does it stand in relation to its competitors? Just by doing the proper research, companies can add value to the business.”
He said intermediaries, too, can play a major role. “It is important to have someone who can screen for trade buyers. We know people who are on the lookout for travel and tourism companies throughout the world. It is worth knowing those buyers who like the travel and tourism sector. While some buyers have lost their shirts, others are enthusiastic buyers and have done very well.”
The other advantage of using intermediaries is that they can be very rude and direct and not beat around the bush as against people who try to sell each other because they know each other and don’t want to offend each other in the negotiations.
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